What the horizontal drilling tax break is costing your kids’ school

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by April 22nd, 2014 Posted in , ,

drilling-educationFor Oklahoma’s elected officials looking to increase funding for education, the sensible solution can be found right under our feet. By doing away with what has become an increasingly unnecessary and unaffordable tax break, every school district and every school child in Oklahoma would benefit

A new set of fact sheets released today by Together Oklahoma, based on data from OK Policy, shows how much additional funding each school district in Oklahoma could receive if the increasingly costly and unjustified tax break for horizontal drilling was eliminated and the money was used instead to boost public education.

The horizontal drilling tax break is projected to cost the state $252 million in lost revenue this year. If this revenue were distributed through the state aid formula, it would represent a 13.7 percent increase in state aid funding for every school district in Oklahoma, and an average of $369 more in per pupil funding across the state.

The state’s two largest school districts – Oklahoma City and Tulsa – would receive an additional $14.6 million and $13.0 million respectively. Sapulpa Public Schools, home of Senate President Pro Tem Brian Bingman, would receive $1.5 million, while Fairview, home of Speaker Jeff Hickman, would gain an additional $228,000. In Tecumseh, home of Governor Mary Fallin, school funding would be boosted by $1.1 million (see methodological note below).

Since 2008, state aid funding has fallen by $213 million at the same time as public school enrollment has grown by nearly 40,000 students. State per pupil funding has been cut by 22.8 percent once adjusted for inflation, which are the steepest cuts in the nation, according to a study by the Center on Budget and Policy Priorities. As a result of reduced funding, class sizes have grown, course offerings have shrunk, and the state has failed to provide adequate support for students and teachers who are under increasingly strict mandates to perform at higher levels.

Oklahoma’s elected officials have expressed support this year for boosting education funding, but they have substantially less revenue to build a budget compared to last year, due largely to the escalating cost of tax breaks, especially the tax break for horizontal drilling.

Oklahoma levies a 7 percent gross production tax on oil and gas but taxes horizontal wells at just 1 percent for the first 48 months. The tax break was enacted in the 1990s, when horizontal drilling was a new and experimental technology. Now it is standard practice, with over 90 percent of the rigs operating in Oklahoma drilling horizontally. The cost of the tax break has ballooned from $36 million in 2008 to an estimated $252 million this year. The tax break is set to expire in July 2015.

A growing number of elected officials, business leaders, and others are openly questioning whether government should continue to subsidize well-established economic activity. Recently, former Oklahoma City Mayor Kirk Humprheys stated, “I don’t think government should incentivize anything that is going to happen without the incentives and believe me, horizontal drilling is going to happen without the incentive.” Last summer, Finance Secretary Preston Doerflinger said, “Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice. It’s not responsible for government to give money away as an incentive if no incentive is needed.” Oilman John Brock has stated, “It’s hard to give up an incentive tax break after 20 years, but it’s time to give the taxpayers a break and restore the gross production tax to the same as normal oil and gas wells.”

A 2013 report found that Oklahoma’s taxes on unconventional production of oil and gas, or horizontal drilling, are among the nation’s lowest and would remain relatively low even if the state eliminated the tax breaks currently benefiting horizontal drilling. Oklahoma’s effective tax rate on oil is 3.3 percent, compared to 11.5 percent in North Dakota and 6.7 percent in Texas.

Methodological Note: Per-district funding was calculated based on each district’s share of total state aid formula funding in the FY 2014 mid-year allocation as of 12/17/2013 provided by State Department of Education. Per-student funding was calculated based on 2013-14 district enrollment provided by State Department of Education. FY 2014 cost of horizontal drilling tax break is based on estimates provided by Oklahoma Tax Commission, December 12, 2013. Data available upon request  

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